How to get ready to sell your agency

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Webinar presented live on January 8, 2025

So you think you might want to sell your agency in the next few years. What should you be doing now to get ready?

In this webinar, Chip Griffin will guide you through the steps you need to take before you put your firm on the market and begin active M&A conversations with potential buyers.

He will cover:

  • Setting your own goals for the sale
  • Understanding your exit options
  • Maximizing your sales price
  • Putting your best financial face forward
  • Getting your team “buyer ready”
  • Preparing yourself for the transition
  • Growing your acquisition network
  • Finding the right M&A advisors

By laying the groundwork now, you can increase your odds for a satisfying outcome.

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View Transcript

The following is a computer-generated transcript. Please listen to the audio to confirm accuracy.

Hello and welcome to today’s SAGA webinar, Ready, Set, Sell. I’m Chip Griffin, the founder of SAGA, the Small Agency Growth Alliance, and I think we’ve got an interesting topic on tap today. I know it’s a question that I get a lot of times from agency owners thinking about selling in the next few years, what should I be doing now?

And so that’s very much what we will be covering today. While people are still filtering into the room though, I will go through a few housekeeping items. And so if we Take, let’s see, switch. There we go. Too many buttons here. For housekeeping, a replay of this webinar will be made available to you.

So, feel free not to take notes. You can access the recording after the fact and just focus on the substance that we’re covering here. If you’re attending live, you can use the Q and A function to ask questions. It should be at the bottom of your screen. Feel free to submit your question at any time, but I will take all of the questions at the end of the prepared presentation portion of today’s webinar.

If you’re watching on replay, you won’t have the live Q and A possibility, but you can feel free to email me at chip@smallagencygrowth.com. Be happy to try to answer any questions that you may have, or you’re welcome to join our free Slack community. And that’s a great place to go and ask questions that I can answer, that your peers can answer and other experts in the industry can touch on as well.

If you’re talking about this webinar on social media, I’d encourage you to use the hashtag agency leadership to make it easily discoverable. And of course, any of the resources that I happen to mention today, and lots that I don’t, will be available at smallagencygrowth.com. Just use the search function, and I bet you can find something on just about any agency business related topic that you can think of.

So with that, let’s take a minute to just talk about what the agenda is for today. And we’re going to start by thinking at the beginning. What are your goals for selling? Why are you even thinking about selling your agency in the next few years? And I should tell you, if you’re thinking about selling more quickly than that, today’s webinar will still have some value to you, but it’s really focused on those who are thinking about selling, let’s say, in the next three to five years.

If you’re looking at beyond that, again, it still has value to you, but really the content is targeted at that particular time frame for folks. We’ll also talk about understanding what your options are for exits. There are all sorts of different ways that you can sell or exit your agency, and we’ll try to touch on some of the most common ones and what some of the pros and cons are there.

We’ll talk about how you maximize the sales price with a potential buyer. We’ll talk about how you put your best financial foot forward, how you get your team buyer ready, because remember, when you’re being purchased, it’s not just you, it’s not the business in an abstract, it’s your entire team. We’ll talk about how to prepare yourself for the transition, going into being the owner of the business to now having sold it, because there are some challenges that come along with that as well that you need to be thinking of, and the sooner you think of them, the easier it is for you to come up with a plan to address them.

Finally, we’ll talk about some of the nitty gritty of moving into the actual sales process. How do you grow your network of potential acquirers? And how do you seek out and choose an advisor to help you through the M& A process. We’re not going to go through the actual M& A process itself, negotiating deal terms, all those kinds of things.

That’s something that we may cover in a different webinar. And there are already webinars on the SAGA website in the library that you can find that are on the topic of M& A that touch on some of those issues as well. So with that, let’s start diving into the content at hand. And the first question that you need to ask yourself is why do you want to sell the business?

And there’s a whole bunch of different reasons that owners give me when they come to me and they say, I’m thinking about selling. Sometimes they’re just frustrated with the business and they’re sort of at their wits end and they want to move on from it. Sometimes it’s that they’re moving on to a different phase of life, retirement or something else where they just, they don’t want to be a business owner.

Sometimes it’s, they’re just bored with the business and they want to go do something else. There’s a lot of different reasons that you might choose to exit your business, but understanding why you want to sell can really help. Because it helps you nail down the specific goals for a transaction. You don’t really want to go into this just thinking, Hey, I’m just going to sell and I just want to get the most money I can.

Those are nice things, but you need to really understand what you’re trying to get from it. And I would encourage you to actually start with a post sale vision for yourself. What do you see yourself doing afterwards? If it’s retirement, that’s easy. That’s clear cut. But if it’s not retirement, what do you see yourself doing?

Are you looking to work for the acquirer? Are you looking to be part of a larger enterprise by through a merger or something like that? Are you looking to move on and do something different? Are you looking to start your own agency again, doing something else? In a few years time after you’ve passed any non competes or other covenants that may be in place with the buyer.

Those are all things that you want to think about because how you envision that portion of it will help you to understand which sales options are best for you and then later on help you to evaluate the individual deals. But you really want to start with these understanding what you’re trying to achieve because it will help you to get that clarity that you need to find the right path forward for a sale.

Alternatively, once you go through this exercise, you may discover that what you really want to do is make some changes to your business, fix certain things, change certain things that will turn it into a business that you actually enjoy owning and operating again. And in that case, you may postpone the idea of selling your business.

So you want to go through this exercise to really understand those things and make smart choices and not feel like you’re going into something rushed. You need to go in eyes open. You want to be thinking about what you’re, what you’re envisioning in terms of the financial compensation for the sale of your business.

So that means figuring out what the value of your agency is. And ultimately, there are all sorts of formulas that you can use and that sort of thing. But when it comes to selling a business, Really the, the sales price is, the value is whatever the sales price is. It’s whatever the buyer and seller agree upon.

And a lot of times we’ll then phrase it in terms of multiples of profit, in the, the agency industry. And so we may say that you sold for three or four times your annual profit or your trailing 12 months profit or different things like that. Those are all things that you, you come up with, but oftentimes they’re reverse engineered.

You come up with them after the fact, after you’ve settled on a number. But you can still use valuation as a tool to understand what ballpark are you in? And my experience is that a lot of agency owners overestimate the value of their business. And they often times think that they are going to reap much higher rewards from selling than they actually are.

And so I would encourage you, if you have any uncertainty about the value of your business, to really dig into this topic a little bit more. Because you really, at the outset of thinking about selling, you want to have realistic goals in mind. If you’ve got a business that’s generating 100, 000 a year in profit and you come and say, okay, well, I’m looking to sell for at least a million dollars, that’s probably not realistic.

Now, there are circumstances where once you recast the earnings and do certain things that maybe there is some buyer out there who would pay that, but your odds are pretty low to get a multiple like that. So you want to try to understand those things. And there are certainly plenty of advisors out there who can help you.

Through that process to either to get a formal valuation or at least an informal idea of what is realistic to expect. The other thing you want to be thinking about though in terms of your goals for a sale are what do you want the future of the agency to be? And In some cases it may be I’m looking to sell it and whatever the buyer wants to do with it is fine.

But my experience is that a lot of agency owners have spent a lot of their time, their energy, their blood, sweat, and tears into building a business. And so they care about what is the future of that business. Is it going to operate as an independent brand? Is it going to be subsumed by a larger agency and really just gut it for the, the clients and talent, that are there.

Those are things that you want to think about because if you’re trying to position for something in particular, the more you know about that and the more you think about that early on, the more likely it is to happen. Now, of course, once you’ve sold the business, it’s no longer in your control and pretty much anything can and will happen.

But trying to think things, think those things through and decide if they’re important to you or not. Along the same lines, many owners are particularly concerned about what happens to at least key employees, if not their entire teams. The more concerns you have around that, the more guardrails you want to put in place, the tougher it’s going to be to maximize your sales value.

But you still want to know if that is a priority for you, because if it is, then that’s something that you need to consider as you’re doing your run up to the sales process. And as you’re considering the advisers that you want to work with, and as you’re considering the potential kinds of acquirers or exits.

So think all these things through. Really get these goals nailed down because it’s gonna make the rest of the process a lot easier and a lot more productive for you. So I think it’s important to take a couple of quick reality checks here. And I’ve written a number of articles about some of the myths around selling your agency and some of the pitfalls that you need to be thinking about.

But there are a few things in particular that I think you want to be focused on right now at that goal setting process. The first is actually the third one on this list, which is that valuation that I was talking about. Understanding that acquirers are probably going to look at your business differently than you are.

We’ll talk about some of the levers that you can control over the next three to five years in order to hopefully escalate that valuation and increase the amount of compensation you get for selling the business, but you want to nail that down and understand that early on. You want to understand that these days, very few agencies are selling for all cash or even largely cash at closing.

In most cases, there’s some form of an earn out that may be 2, 3, 4 years of earn outs, of payments to you from the acquirer that will count towards the total value of the deal, but that you don’t get guaranteed and you definitely don’t get up front. More realistically up front, you might get, say, a third to 40 percent or so of the, the total deal value.

Those numbers will change based on the circumstances of the individual deal, but generally speaking, you want to think about it in these terms. When you’re getting paid guaranteed cash at closing, the more guaranteed cash at closing, typically the lower the total value, potential value of the deal. The higher the potential value of the deal, typically the less of it that you’re getting at closing because you’re agreeing to put more of it at risk and the buyer is typically taking a gamble that, that any upside will be worth paying that extra to you over time.

So understanding how the financial levers take place here can really help you in setting your goals, setting your timelines, understanding what is and is not possible. And then finally, you really need to be thinking about the fact that most acquirers are going to want you to come work for them for at least a couple of years after the fact to help smooth the transition with clients, with team members, and that sort of thing.

You’re typically going to be switching from the role of having been an owner and the decision maker, the sole decision maker in many cases for the last 5, 10, 15, 20 years into a role where you are now becoming subordinate again and acting as an employee again. And so you want to understand that that’s a transition that will take place and it’s an important reality check at the start of the process. So you can think it through and and steal yourself if necessary for that possibility.

Or decide that it’s not the right solution because of what that entails for you. So what are the different options that we can think about when we’re thinking about selling our agency in that three to five year time frame? And this is not a complete and exhaustive list, but these are some of the most common exit strategies that you might have when it comes to selling the business at least.

There are obviously other ones, you can simply close the doors, you can sell off individual clients, those sorts of things. But if you’re looking to sell the business. Typically the things you would think of are potentially selling to a key employee, someone who’s worked for you for a long time. Maybe they’re interested in having their own agency and so you can work out a deal with them.

There are ESOPs employee stock ownership plans that allow you to sell to all of the employees of your agency. I’ll tell you, I am not a fan of ESOPs. We can have a longer discussion about that some other day, but in general, I am not an advocate for them, but you should be aware that it is an option that is out there for, the initial owner to exit the business.

Some small agencies will transition to employees. You may not think of this necessarily as a sale per se, but it can be structured as a sale just as you might to an individual employee, depending on how you want to arrange things, but it is an exit strategy to consider. You can merge with an equal. So if you’re a five person agency, you might merge with another five person agency to create a 10 person agency.

This is great math, isn’t it? So this is what you typically might look to do. If your reason for exiting is not that you want to get out of the business entirely, but that you’re looking to be part of something bigger, but still where you have a large voice. So mergers are something to consider in the sales process that, that is a little bit different from simply selling and eventually walking away.

Sometimes you might sell to another agency, a mid sized, a large agency that’s looking to acquire either the particular kinds of clients you have, the particular talent that you have, the geographic region that you serve, those sorts of things. It’s all reasons that another agency might be interested in acquiring you.

But there are also these days a lot of non agencies that are acquiring agencies. It might be a private equity firm. It might be a consulting firm. It might be a software firm. A lot of these other kinds of businesses are seeing value in acquiring agencies. So it is a, a more modern phenomenon that you’re seeing these businesses acquire agencies.

So it’s something that you should consider as a possible venue for you to sell. Obviously, there are, again, pros and cons to each kind. of acquire that you need to think through before you go through with that particular deal. Obviously, holding companies, they’ve been a very popular tool for selling agencies for many years.

I have said many things about holding companies, but bottom line is not a fan of them. Not generally a fan of selling to them, but they can be a way to maximize the actual sales price. Just know that it comes with a lot of potential trials and tribulations, shall we say. And then finally, you might consider selling to become part of a roll up.

There are a number of agencies out there that are looking to grow through acquisitions and then sell the combined entity somewhere down the road. Again, pros and cons to this approach, but it is something that has become more common and something that you should be aware of as you’re considering your own options.

So now that we know, sort of, we’re thinking through why we want to sell, we’re thinking through what kinds of deals we might do, how do we make our agency over the next three to five years as attractive as possible and as valuable as possible? And so I think we want to look at two things. We want to look at the reasons why buyers might be inclined to pay more for your business, as well as some of the reasons why they might be inclined to pay less.

And so some of these things are going to be effectively no brainers, right? The more profits you have, the more value you have. So you do want to be thinking, how to maximize the profit of your firm in the years ahead. At the same time, you want to be thinking about things that, that make for a sustainable business.

So predictable revenue, the more recurring revenue you have, typically buyers will reward that through a higher sales price. If you’re doing largely project work, in many cases, buyers will discount that. It doesn’t mean that project based firms can’t sell or can’t generate a top dollar. It just means that you need to find the right buyer who is willing to look at that and understand what it means for them and how it fits into their own business picture.

So predictable revenue, diversified revenue. That means getting revenue from a wide range of clients that are not tied to each other, potentially different industries that are not all, cyclical in the same cycle. So that if one is up, perhaps another might be down and they compensate for each other as opposed to ones that move in tandem.

So if they’re both down, then all of a sudden, you know, that’s worse for the business. That’s something that the buyers will often pay attention to. They’ll definitely be looking at your pattern of growth. And it’s one of the reasons why this webinar is centered on the three to five year time horizon for selling, because that’s, that’s the horizon that most buyers are going to look at.

The most common is that they will ask for your last three years of financials. And so you want to make sure that you’ve set yourself up to show a pattern of growth, a pattern of profitability, over those three years. And so if you’re thinking about that now, you can start to frame it in such a way that a potential acquirer is going to be pleased with what they see.

They obviously want to see those strong profit margins. Ideally, that means that you’re targeting something in the 20 percent range, agency wide as your actual profit margin. That is your profit margin after you pay yourself a reasonable salary. Again, lots of resources on the SAGA website about owner compensation and the importance of understanding that.

In the context of the profit discussion, but you can’t just say that, that all of your compensation is profit. And that’s one of the reasons why small agency owners tend to be disappointed at their valuations because they pay themselves either no salary or a below market salary, and so that inflates their profit margin.

And once you recast those earnings to, to include a reasonable salary for yourself as the owner, all of a sudden that profit margin comes down. So you want to be thinking about that and managing towards that if you’re looking to maximize your sales price, in three or four years time.

You want to be thinking about the team that you’ve got and how you fit into it. In other words, can you be extracted from the equation and the business still thrives? If so, most buyers will pay more for that kind of business versus one that is really tied to you as an individual. They want a talented team that can execute on the work that you’re doing and selling, and so that it’s more than just a personality of one that they are buying.

They’re potentially looking for things that can fill their own gaps. So this is a little bit harder for you to manage now, but it’s something for you to be thinking about and perhaps observing the transactions that are taking place out there to see what kinds of, of things the agencies are doing and what the acquirers are looking at them for. So for example, this might be that consulting firm that’s looking to get more of the agency experience. That’s a gap that they have and consulting firms as they’ve moved into providing direct services and marketing, PR, digital, et cetera. They’re interested in bringing agencies in house so that they can provide those services to the clients.

Same thing with software companies. They’re often now looking. for this kind of a setup. And so that might be a gap, but it might be a gap where a larger agency doesn’t have the particular skill set that you have that your team has. So maybe a PR agency wants to acquire a digital agency. That’s a gap.

That’s something that you can help with. And so that’s something that is typically worth a bit of a premium to the buyer over what you might do off of a simple mathematical equation on valuation. And finally, there are the intangibles. There are the agencies that are out there that, that someone just, they really want to have them because they’ve got a lot of cachet and they’re, they’re, you know, the buyer thinks it’ll make a splash to acquire it.

Sometimes buyers want to do acquisitions just to say that they’ve done acquisitions. It’s not necessarily the best strategy, not one I would necessarily recommend, but I’ve seen it where an agency wants to show a steady pattern of acquisitions because they believe that it can help them win further business because it looks like, they’re being able to tell the story that they appear to be growing and that sort of thing.

As we look at the things that increase the value there are things that decrease the value. And some of these are simply the flip sides of what we talked about already, but they sometimes are a little bit more than that. So client concentration. Obviously we talked about the value of revenue diversification in order to increase your value. From the devaluation side, if you will, one of the things that you need to think about is if you’ve got clients that are 20, 25, 30 percent or more of your annual revenue, that’s a real client concentration problem that a potential buyer is going to be concerned about.

And you need to look at not just individual clients, but the relationships between them. So, a lot of small agencies may work with a number of different sub brands within a larger business. And while they, those contracts may have been technically won independently, they also are tied together because the parent company could change policies around the use of outside agencies, restrict the list of eligible agencies, or you could have a bad experience with one brand and then, the parent company says, everybody, you can’t work with Acme Agency anymore because we just don’t trust them.

We don’t feel comfortable working with them. And so those are the kinds of things that buyers are going to generally apply a discount to when they’re valuing your business and offering a sales price. So you want to be working over those next three, four years to make sure that you don’t have a client concentration problem.

We talked about margins already, but you definitely need to be focused on this. You should be focused on this anyway, even if you are just continuing to planning to continue to run the business for the next 10, 15, 20 years. Margins matter. Profits matter. You need to be thinking about how you’re pricing effectively, scoping effectively, and managing the work effectively to drive reasonably strong profit margins for the business.

Because that is something that every acquirer will pay attention to. Acquirers are not interested in buying struggling businesses at a fair price. They’ll buy a struggling business, a struggling agency, but they’re going to do it at a fire sale price that you’re probably not going to be happy with unless you’re really just looking to throw in the towel and get out the door.

Agencies that rely on one individual. That could be the owner. It sometimes is a key employee. If those are individuals that, without which the agency could not operate effectively or profitably, couldn’t win business, easily. Those are the kinds of things that generally are going to drive a discount in the offering price from a potential buyer.

So to the extent that you have a reliance on yourself, for example, or a key employee, you want to spend the next three or four years figuring out how you can balance that out, how you can bring in additional talent, how you can adjust the business model so that it is not so highly dependent. upon any one person.

I’ve seen, for example, agencies where the, all of the clients are tied very personally to the owner of that business. And while the numbers look great on paper, they are so tied to the owner that if the owner goes away and is not in the picture, those relationships are definitely at risk. And a potential acquirer is going to look very negatively at that sort of thing.

So try to find ways to diversify the importance of individuals, whether it’s yourself or someone else in the business over the next few years. Small size can also cause a discount. Generally speaking, the smaller you are, generally the lower the premium that a potential buyer will pay simply because you’re not buying as much.

If you’re a two person agency, you, there’s just not as much to acquire and there’s a lot higher risk. And of course that risk of any kind is something that really impacts the value of your business. So anything that you can think of that is a risk in the business. That’s the risk of, employees going out on their own, risk of lawsuits if you’ve got debt on the books, all of these, if you’ve got silent owners in the business, those are all risks that potential acquirers are going to look at and potentially be concerned with.

So those are all things that you want to try to address over the next few years so that at the very least you have a good strategy in place. If you haven’t already fully addressed those issues by the time it comes to a sale.

So, how do you frame your financials in such a way that you can make a compelling story when it’s time?

Because you want to be thinking about that now and not scrambling at the time where you’ve got a potential buyer on the line. You want to be preparing your financials today so that they look as strong as possible. And I’m not just talking the actual numbers. I’m talking now about some of the key things you need to be thinking about, like professional preparation.

You need to make sure that you are having your books done by someone who is competent, who can prepare things readily so that you can easily generate financial reports when it comes time to sell the business. You don’t want to be one of those agencies that’s pulling together a bunch of different spreadsheets and trying to acquire data from here, there, and everywhere.

When a potential buyer is asking for them. You need to have a ready made package that shows your three year track record, your financials, that it’s got it all there in a nice, neat package. You want to make sure that it’s all in a software platform, whether that’s QuickBooks or something else, where you can quickly generate reports if there are conversations that, that get progressed with a potential buyer, so that you can generate the reports that they ask for that maybe show breakdowns of certain expenses or revenue line items, et cetera. So you really want to have this package put together. And if you’re working, we’ll talk later about working with M&A advisors. They can really help you put together a nice package that makes it very clear, the value that you’re bringing to the table.

And it makes it very clear what your financial performance has been in such a way that you’re addressing the questions that buyers typically have. And you really want to make sure that these documents can explain key things like what is your profit margin, what is your compensation as the owner so that they know that it’s, it’s fair and accurate.

Being able to answer the questions about client concentration, recurring revenue versus project revenue. If you structure your financial reporting today in that way, it makes it so much easier three years down the road when you’re getting ready to sell. And you don’t have to do a lot of massaging and re engineering and digging through files and talking with your bookkeeper or accountant.

Make sure that you you’re really getting this process in place today. It’ll be useful to you running the business on your own, but it’ll be particularly useful when it comes time to talk with a potential acquirer.

And then finally, you want to make sure that you’re able to clearly explain any anomalies that are in these reports.

So if you show particular spikes in revenue or expenses, anything that’s unusual, you want to have, if you don’t explain it directly in the financial package that you’re providing, at least have a ready answer, so that if the buyer says, well, wait a minute, why, Why in June of 2023 did you have this giant spike in revenue?

It doesn’t make any sense to me. You don’t want to sit there and say, Oh, that’s a good question. I don’t know. I’ll have to go back and ask. Make sure that you’ve gone through your documents and you go through your financial reports on a regular basis so that you understand them and you understand intimately why those numbers may be up or down in any particular month, year or quarter.

So all things to think about so that you can put your best foot forward when it comes to financial reporting. You need to think about how you prepare your team, and I’m not talking at this point, you’re not going to tell your team I’m thinking about selling in three or four years. That, that is not something I would encourage, but I’m talking about how do you prepare to structure your team?

How do you work with them in such a place that it helps to maximize your value and makes the exit as smooth as possible? So some of this we’ve talked about a little bit already. You want a team that’s structured well so that it is – you’re providing value to the team. You’re not just dead weight, but you’re also not so essential to it that it can’t operate without you.

And a good test for this is, can you take two or three weeks off without having to answer a hundred emails a day and constantly putting out fires and answering questions? If your team can function well, and your clients are still happy, and you can take those two or three weeks off, then you’re probably in pretty decent shape.

But those are things that you want to be looking at now. How do you make those structural decisions that you need so that you’re not dependent upon yourself or any other individual, that you’ve got some good redundancies within the team. Those will all help you when it comes to maximizing what you can get for selling your business and the ease with which you can sell your business.

You also want to be thinking though about making sure you have the proper paperwork in place with all of your team members. Nothing puts a potential buyer off more than looking through and finding out that you have employees who can go out and poach your own clients from you, at any given moment.

So make sure that you have the proper agreements in place with your team members so that they, so confidential information is protected, there are non solicitation agreements in place. Work with lawyers and HR advisors to make sure you have the proper paperwork in place for all of your employees, it will make your life so much easier when it comes time to potentially sell the business.

Obviously, all of this doesn’t negate the fact that you need a highly capable team. The better your team can perform, the better the results that they can produce, the more attractive that is to a potential buyer. Obviously, you need to make sure that the compensation is fair and, and works to help you still generate a profit.

So you can’t just go buy an all star team of people and say, okay, well, this is going to make it easier for me to sell. It still needs to be a sustainable business model, but to the extent that you have a more capable, more talented team, it’s going to help.

And finally, sort of the less tangible thing, but something to consider is making sure that you’re hiring a team around you that is adaptable.

Because if you’re thinking about selling the business, you want people who are able to make, who can adapt to that new environment, that new employer that they may have down the road. It shouldn’t be your primary consideration, but if you have the choice between two equally capable candidates, but one seems to you to be more agreeable, adaptable, you know, able to, to learn and grow.

That person is probably going to be more of an asset when you’re potentially selling the business and less likely to be a squeaky wheel that causes some sort of a challenge during due diligence or at some other stage of the sales process. Again, not the thing that I would focus on the most, but something to keep in mind at least.

And frankly, those individuals are usually going to be a better fit for your business in the long term anyway, so it’s a win win.

How should you prepare yourself? And I’m talking about you, not the business now. So we’ve talked about how you need to think about what your post sale vision is. But you need to prepare yourself for everything that means.

And you need to accept that it’s just going to be different. And it is, I mean, as someone who has sold my own business, I can tell you that it is very weird having the brand that you’ve built over the years to be something that you don’t get to make the final decisions about. And that you don’t get to, to just say, yeah, I’m just going to do this or that.

You, you need to go check with other people. And you need to go, you need to build consensus. And, and all sorts of things that you didn’t have to do for the last period of time. So you need to accept that it’s going to be different. You also need to be skeptical of the promises that potential acquirers are making.

Because a lot of times, we all get caught up in the sales process. We all get excited about what it means, all the good things. But we also need to be realistic about what the potential pitfalls are. And talking with others who have gone through the process of selling their own business, you can often learn a lot and understand, are these things that are potential deal breakers for you?

Are they things that you just want to be aware of? Or are they things you don’t really even care about? If someone wants to go and get rid of the brand that you built, so what? Who cares? But you want to be thinking those things through and not get so wound up in the excitement of possibly selling the business that you’re not thinking clearly about what the change is going to mean for you.

You also need to be thinking about what it is that you want to be doing. And we talked about this a little bit in goal setting, but now in over the next three years or so, you need to start thinking about what does that post sale life look for you? If it’s again, this is assuming it’s not retirement. And so if it’s not retirement, you want to make sure that you are structuring the business in such a way that you are perhaps creating stepping stones to what your future career might be, or you need to be thinking about potential acquirers in terms of ones that are less likely to want to put hefty restrictions for longer periods of time on you for what you can do, post sale. And so thinking those things through will really help you to, take steps now to be ready then. And you don’t want to count your chickens before they hatch or anything like that, but you still want to be thinking about these things and laying that groundwork because it will make the transition a whole lot easier.

A lot of the owners that I know, they go through the sales process and then they kind of wander around a little bit aimless afterwards because they haven’t really come up with that plan in advance. And it sounds great to say, well, I’m just going to take some time off and think about my options. But the longer that you do that, if you haven’t made life changing money out of the sale, and most of you are not going to make life changing money out of the sale. That’s eating into the runway that you have. It’s eating into the flexibility that you have, and so the better prepared you are, the more you can hit the ground running post sale and be in a place where you are in that next stage of your career and your life that you’ve been dreaming of and why you’ve been thinking about selling your business.

So, so now let’s, let’s get into the nitty gritty. How do you think about expanding the pool of acquirers? Because you can lay a lot of groundwork for the business, but you can also lay a lot of groundwork for who potentially can buy your business in three or four or five years time. And so one of the things that you want to be doing is, keep a list of potential buyers.

This might be agencies that you’ve worked with in the past. It might be consulting firms that you’ve worked with in the past. It might be just folks that you see referenced in AdWeek or PRWeek or one of these publications. And you see that they’re buying different agencies, maybe you add them to the list.

And you want to try to build relationships with these folks. But you also want to build relationships with other owners. That would be owners of firms today who may be similarly situated to you. Maybe it opens the door to some sort of a merger or roll up talk somewhere down the road. Maybe they’re actually, you know, in a stronger financial position than you realize, and they could simply straight up acquire you.

We always need to be careful that we don’t read too much into any business, large or small, from what we know on the outside. Because I can tell you, there have been plenty of examples over the course of my career where I’ve looked at a certain business and thought they were particularly large or particularly small based on what I knew on the outside.

And then I got a look at their financials and realized it was a whole different thing. And so you want to be thinking about how you can network amongst your peers, but also seek out others who have sold their businesses over the years that you can talk with them. What was the experience like? What did they do to prepare?

What do they wish they had done three or four years pre sale to get ready? So that you can take advantage of the fact that you’re, you’re visualizing this in your future. It’s not something that you need to do urgently today. So you have that time to prepare, to build your network and to figure out how you want to structure things in a way that works for you and gets the results that you want.

But this is also a time to start at least some casual conversations with M& A advisors. This is a time for you to be scoping out who’s out there, getting to know them, perhaps consuming some of the resources that they’re putting out, because most M& A advisors put out a fair amount of useful resources.

And so you can get to know them and figure out if they might be fits, so that when you get closer to the sales process and when it makes sense to actually retain one of them to help you through the process. You’ve already done a lot of the legwork. And again, like everything else we’ve been talking about today, it’s not a mad scramble at the last minute.

Preparation is really your friend when you’re doing something as significant as selling your own business and moving on to the next stage of your career and life. So let’s talk about that. How do you get help in selling your agency? Obviously we’ve talked about some of the informal things like networks of former owners who have sold, current owners who maybe have had conversations around M and A, but the M and A advisors are something to really think about here in terms of folks who can actually help you.

And again, they do put out a lot of useful resources. One of the things I can tell you is that a number of them, do hold webinars and those sorts of things. Some of you in the agency world may be familiar with David C. Baker. He’s just put out a book not too long ago, Selling Your Professional Service Firm.

He does a lot of work with agencies, a lot of good resources. Consume those. And I’m not necessarily recommending David. Great guy. I haven’t worked with him on M& A. So I can’t directly recommend him, but he’s someone you should check out. And there are other people, Rick Gould, for example, in the PR agency space. A lot of these folks are really useful. They put out a lot of useful content, books, webinars, events and workshops. All of these things are worth understanding and grappling with so that you can start to get to know the M& A advisor space so that you can find someone that you’re comfortable with. I think the key thing though is to make sure that you’re working with someone who has experience with agencies.

You will, there will be no shortage. In fact, you probably already have your inbox, occasionally getting hit up by various business brokers saying, Oh, we’ve got a potential buyer for your agency. Or, you know, we, we checked you out and we’ve, we’ve found you interesting. Most of those are rubbish. Most of those are just, you know, people who are just casting lines to see what might happen, but they don’t know much about the agency space and they certainly don’t know anything about you and your particular situation.

You want to work with an M& A advisor who knows the space, who understands what the levers are that drive valuation, how to maximize the value that you’re getting, how to protect you against the potential pitfalls that are out there. And so the experience that they have in the agency space directly is going to be incredibly important and something to look at.

This is another place where talking with others who have sold their own agencies can be really helpful. Understanding from those folks, what worked, what didn’t, who did they work with as an advisor, can be very valuable. You don’t necessarily need to work with someone who is a true M& A advisor. You might choose, if you have a really trusted business lawyer or accountant that’s used to doing this kind of stuff, they might be able to help you as well.

They’ll do different things than what an M& A advisor who is seasoned in that particular aspect of things will do but that but it might be what you need. Not everybody needs the exact same solution but you need to think about and talk to as many people as you can so you find the right fit. It really is personal. When you’re talking about selling the business that you put in all of this time and energy into over the years. You really want to find someone who is someone that has a similar worldview to yours, who can help you, to get what you want from the business, and is not someone out there looking to just pad their own pockets. Whether or not it is good for you or not.

And that’s why you also need to understand the different compensation structures that exist for M& A advisors. Because some work off of commission on the total deal value. Some charge flat fees to get involved. Some charge hourly rates. There’s a lot of different compensation models and so you want to understand those and really work through, the math to make sure that it, it really works and makes sense for you and what you’re trying to do.

So these are all things to consider as you’re figuring out how to get the help that you need in order to get the most from your business and get the terms that you’re looking for when the time comes. So with that, let’s tie up with a ribbon here, the key points that we want to be thinking about here.

We want to be thinking about, what we want from the business or from the sale rather. We want to make sure that were clear about that as we’re going into the process. It helps us drive the decisions that we make over the next three or four years to maximize the value and get the kind of deal that we’re looking for.

It’s important that you put in the preparation over this time frame. Take advantage of it. Don’t just say, yeah, I’d kind of like to sell in three or four years. Then you kind of see what happens. If that’s your plan, if that’s your goal, think about the steps that we’ve talked about today that will help you to maximize your value, build a team structure, build a financial structure, set the course to give you what you want from the goals that you’ve set.

And then finally, turn to get the help that you need when it’s needed, whether that’s an M& A advisor or the free advice that’s out there. Webinars like these, talking to your peers. Help is really important and will help you to navigate this process, and make the right decisions and sell frankly at the right time for the right reasons.

So, with that, that will wrap up the prepared portion of today’s presentation. If you’ve been watching live, we’ll move into the Q& A portion here in just a moment. If you are watching this on replay, the replay will conclude here, but feel free to send me an email at chip@smallagencygrowth.com.

I’d be happy to answer it. If you’re watching live, you can use that email address as well, if you’ve got a question that you’d rather I answer, but not in a public forum. So, thank you all for joining me today, and we’ll head to the live Q& A momentarily.

The following is a computer-generated transcript. Please listen to the audio to confirm accuracy.

Hello and welcome to today’s SAGA webinar, Ready, Set, Sell. I’m Chip Griffin, the founder of SAGA, the Small Agency Growth Alliance, and I think we’ve got an interesting topic on tap today. I know it’s a question that I get a lot of times from agency owners thinking about selling in the next few years, what should I be doing now?

And so that’s very much what we will be covering today. While people are still filtering into the room though, I will go through a few housekeeping items. And so if we Take, let’s see, switch. There we go. Too many buttons here. For housekeeping, a replay of this webinar will be made available to you.

So, feel free not to take notes. You can access the recording after the fact and just focus on the substance that we’re covering here. If you’re attending live, you can use the Q and A function to ask questions. It should be at the bottom of your screen. Feel free to submit your question at any time, but I will take all of the questions at the end of the prepared presentation portion of today’s webinar.

If you’re watching on replay, you won’t have the live Q and A possibility, but you can feel free to email me at chip@smallagencygrowth.com. Be happy to try to answer any questions that you may have, or you’re welcome to join our free Slack community. And that’s a great place to go and ask questions that I can answer, that your peers can answer and other experts in the industry can touch on as well.

If you’re talking about this webinar on social media, I’d encourage you to use the hashtag agency leadership to make it easily discoverable. And of course, any of the resources that I happen to mention today, and lots that I don’t, will be available at smallagencygrowth.com. Just use the search function, and I bet you can find something on just about any agency business related topic that you can think of.

So with that, let’s take a minute to just talk about what the agenda is for today. And we’re going to start by thinking at the beginning. What are your goals for selling? Why are you even thinking about selling your agency in the next few years? And I should tell you, if you’re thinking about selling more quickly than that, today’s webinar will still have some value to you, but it’s really focused on those who are thinking about selling, let’s say, in the next three to five years.

If you’re looking at beyond that, again, it still has value to you, but really the content is targeted at that particular time frame for folks. We’ll also talk about understanding what your options are for exits. There are all sorts of different ways that you can sell or exit your agency, and we’ll try to touch on some of the most common ones and what some of the pros and cons are there.

We’ll talk about how you maximize the sales price with a potential buyer. We’ll talk about how you put your best financial foot forward, how you get your team buyer ready, because remember, when you’re being purchased, it’s not just you, it’s not the business in an abstract, it’s your entire team. We’ll talk about how to prepare yourself for the transition, going into being the owner of the business to now having sold it, because there are some challenges that come along with that as well that you need to be thinking of, and the sooner you think of them, the easier it is for you to come up with a plan to address them.

Finally, we’ll talk about some of the nitty gritty of moving into the actual sales process. How do you grow your network of potential acquirers? And how do you seek out and choose an advisor to help you through the M& A process. We’re not going to go through the actual M& A process itself, negotiating deal terms, all those kinds of things.

That’s something that we may cover in a different webinar. And there are already webinars on the SAGA website in the library that you can find that are on the topic of M& A that touch on some of those issues as well. So with that, let’s start diving into the content at hand. And the first question that you need to ask yourself is why do you want to sell the business?

And there’s a whole bunch of different reasons that owners give me when they come to me and they say, I’m thinking about selling. Sometimes they’re just frustrated with the business and they’re sort of at their wits end and they want to move on from it. Sometimes it’s that they’re moving on to a different phase of life, retirement or something else where they just, they don’t want to be a business owner.

Sometimes it’s, they’re just bored with the business and they want to go do something else. There’s a lot of different reasons that you might choose to exit your business, but understanding why you want to sell can really help. Because it helps you nail down the specific goals for a transaction. You don’t really want to go into this just thinking, Hey, I’m just going to sell and I just want to get the most money I can.

Those are nice things, but you need to really understand what you’re trying to get from it. And I would encourage you to actually start with a post sale vision for yourself. What do you see yourself doing afterwards? If it’s retirement, that’s easy. That’s clear cut. But if it’s not retirement, what do you see yourself doing?

Are you looking to work for the acquirer? Are you looking to be part of a larger enterprise by through a merger or something like that? Are you looking to move on and do something different? Are you looking to start your own agency again, doing something else? In a few years time after you’ve passed any non competes or other covenants that may be in place with the buyer.

Those are all things that you want to think about because how you envision that portion of it will help you to understand which sales options are best for you and then later on help you to evaluate the individual deals. But you really want to start with these understanding what you’re trying to achieve because it will help you to get that clarity that you need to find the right path forward for a sale.

Alternatively, once you go through this exercise, you may discover that what you really want to do is make some changes to your business, fix certain things, change certain things that will turn it into a business that you actually enjoy owning and operating again. And in that case, you may postpone the idea of selling your business.

So you want to go through this exercise to really understand those things and make smart choices and not feel like you’re going into something rushed. You need to go in eyes open. You want to be thinking about what you’re, what you’re envisioning in terms of the financial compensation for the sale of your business.

So that means figuring out what the value of your agency is. And ultimately, there are all sorts of formulas that you can use and that sort of thing. But when it comes to selling a business, Really the, the sales price is, the value is whatever the sales price is. It’s whatever the buyer and seller agree upon.

And a lot of times we’ll then phrase it in terms of multiples of profit, in the, the agency industry. And so we may say that you sold for three or four times your annual profit or your trailing 12 months profit or different things like that. Those are all things that you, you come up with, but oftentimes they’re reverse engineered.

You come up with them after the fact, after you’ve settled on a number. But you can still use valuation as a tool to understand what ballpark are you in? And my experience is that a lot of agency owners overestimate the value of their business. And they often times think that they are going to reap much higher rewards from selling than they actually are.

And so I would encourage you, if you have any uncertainty about the value of your business, to really dig into this topic a little bit more. Because you really, at the outset of thinking about selling, you want to have realistic goals in mind. If you’ve got a business that’s generating 100, 000 a year in profit and you come and say, okay, well, I’m looking to sell for at least a million dollars, that’s probably not realistic.

Now, there are circumstances where once you recast the earnings and do certain things that maybe there is some buyer out there who would pay that, but your odds are pretty low to get a multiple like that. So you want to try to understand those things. And there are certainly plenty of advisors out there who can help you.

Through that process to either to get a formal valuation or at least an informal idea of what is realistic to expect. The other thing you want to be thinking about though in terms of your goals for a sale are what do you want the future of the agency to be? And In some cases it may be I’m looking to sell it and whatever the buyer wants to do with it is fine.

But my experience is that a lot of agency owners have spent a lot of their time, their energy, their blood, sweat, and tears into building a business. And so they care about what is the future of that business. Is it going to operate as an independent brand? Is it going to be subsumed by a larger agency and really just gut it for the, the clients and talent, that are there.

Those are things that you want to think about because if you’re trying to position for something in particular, the more you know about that and the more you think about that early on, the more likely it is to happen. Now, of course, once you’ve sold the business, it’s no longer in your control and pretty much anything can and will happen.

But trying to think things, think those things through and decide if they’re important to you or not. Along the same lines, many owners are particularly concerned about what happens to at least key employees, if not their entire teams. The more concerns you have around that, the more guardrails you want to put in place, the tougher it’s going to be to maximize your sales value.

But you still want to know if that is a priority for you, because if it is, then that’s something that you need to consider as you’re doing your run up to the sales process. And as you’re considering the advisers that you want to work with, and as you’re considering the potential kinds of acquirers or exits.

So think all these things through. Really get these goals nailed down because it’s gonna make the rest of the process a lot easier and a lot more productive for you. So I think it’s important to take a couple of quick reality checks here. And I’ve written a number of articles about some of the myths around selling your agency and some of the pitfalls that you need to be thinking about.

But there are a few things in particular that I think you want to be focused on right now at that goal setting process. The first is actually the third one on this list, which is that valuation that I was talking about. Understanding that acquirers are probably going to look at your business differently than you are.

We’ll talk about some of the levers that you can control over the next three to five years in order to hopefully escalate that valuation and increase the amount of compensation you get for selling the business, but you want to nail that down and understand that early on. You want to understand that these days, very few agencies are selling for all cash or even largely cash at closing.

In most cases, there’s some form of an earn out that may be 2, 3, 4 years of earn outs, of payments to you from the acquirer that will count towards the total value of the deal, but that you don’t get guaranteed and you definitely don’t get up front. More realistically up front, you might get, say, a third to 40 percent or so of the, the total deal value.

Those numbers will change based on the circumstances of the individual deal, but generally speaking, you want to think about it in these terms. When you’re getting paid guaranteed cash at closing, the more guaranteed cash at closing, typically the lower the total value, potential value of the deal. The higher the potential value of the deal, typically the less of it that you’re getting at closing because you’re agreeing to put more of it at risk and the buyer is typically taking a gamble that, that any upside will be worth paying that extra to you over time.

So understanding how the financial levers take place here can really help you in setting your goals, setting your timelines, understanding what is and is not possible. And then finally, you really need to be thinking about the fact that most acquirers are going to want you to come work for them for at least a couple of years after the fact to help smooth the transition with clients, with team members, and that sort of thing.

You’re typically going to be switching from the role of having been an owner and the decision maker, the sole decision maker in many cases for the last 5, 10, 15, 20 years into a role where you are now becoming subordinate again and acting as an employee again. And so you want to understand that that’s a transition that will take place and it’s an important reality check at the start of the process. So you can think it through and and steal yourself if necessary for that possibility.

Or decide that it’s not the right solution because of what that entails for you. So what are the different options that we can think about when we’re thinking about selling our agency in that three to five year time frame? And this is not a complete and exhaustive list, but these are some of the most common exit strategies that you might have when it comes to selling the business at least.

There are obviously other ones, you can simply close the doors, you can sell off individual clients, those sorts of things. But if you’re looking to sell the business. Typically the things you would think of are potentially selling to a key employee, someone who’s worked for you for a long time. Maybe they’re interested in having their own agency and so you can work out a deal with them.

There are ESOPs employee stock ownership plans that allow you to sell to all of the employees of your agency. I’ll tell you, I am not a fan of ESOPs. We can have a longer discussion about that some other day, but in general, I am not an advocate for them, but you should be aware that it is an option that is out there for, the initial owner to exit the business.

Some small agencies will transition to employees. You may not think of this necessarily as a sale per se, but it can be structured as a sale just as you might to an individual employee, depending on how you want to arrange things, but it is an exit strategy to consider. You can merge with an equal. So if you’re a five person agency, you might merge with another five person agency to create a 10 person agency.

This is great math, isn’t it? So this is what you typically might look to do. If your reason for exiting is not that you want to get out of the business entirely, but that you’re looking to be part of something bigger, but still where you have a large voice. So mergers are something to consider in the sales process that, that is a little bit different from simply selling and eventually walking away.

Sometimes you might sell to another agency, a mid sized, a large agency that’s looking to acquire either the particular kinds of clients you have, the particular talent that you have, the geographic region that you serve, those sorts of things. It’s all reasons that another agency might be interested in acquiring you.

But there are also these days a lot of non agencies that are acquiring agencies. It might be a private equity firm. It might be a consulting firm. It might be a software firm. A lot of these other kinds of businesses are seeing value in acquiring agencies. So it is a, a more modern phenomenon that you’re seeing these businesses acquire agencies.

So it’s something that you should consider as a possible venue for you to sell. Obviously, there are, again, pros and cons to each kind. of acquire that you need to think through before you go through with that particular deal. Obviously, holding companies, they’ve been a very popular tool for selling agencies for many years.

I have said many things about holding companies, but bottom line is not a fan of them. Not generally a fan of selling to them, but they can be a way to maximize the actual sales price. Just know that it comes with a lot of potential trials and tribulations, shall we say. And then finally, you might consider selling to become part of a roll up.

There are a number of agencies out there that are looking to grow through acquisitions and then sell the combined entity somewhere down the road. Again, pros and cons to this approach, but it is something that has become more common and something that you should be aware of as you’re considering your own options.

So now that we know, sort of, we’re thinking through why we want to sell, we’re thinking through what kinds of deals we might do, how do we make our agency over the next three to five years as attractive as possible and as valuable as possible? And so I think we want to look at two things. We want to look at the reasons why buyers might be inclined to pay more for your business, as well as some of the reasons why they might be inclined to pay less.

And so some of these things are going to be effectively no brainers, right? The more profits you have, the more value you have. So you do want to be thinking, how to maximize the profit of your firm in the years ahead. At the same time, you want to be thinking about things that, that make for a sustainable business.

So predictable revenue, the more recurring revenue you have, typically buyers will reward that through a higher sales price. If you’re doing largely project work, in many cases, buyers will discount that. It doesn’t mean that project based firms can’t sell or can’t generate a top dollar. It just means that you need to find the right buyer who is willing to look at that and understand what it means for them and how it fits into their own business picture.

So predictable revenue, diversified revenue. That means getting revenue from a wide range of clients that are not tied to each other, potentially different industries that are not all, cyclical in the same cycle. So that if one is up, perhaps another might be down and they compensate for each other as opposed to ones that move in tandem.

So if they’re both down, then all of a sudden, you know, that’s worse for the business. That’s something that the buyers will often pay attention to. They’ll definitely be looking at your pattern of growth. And it’s one of the reasons why this webinar is centered on the three to five year time horizon for selling, because that’s, that’s the horizon that most buyers are going to look at.

The most common is that they will ask for your last three years of financials. And so you want to make sure that you’ve set yourself up to show a pattern of growth, a pattern of profitability, over those three years. And so if you’re thinking about that now, you can start to frame it in such a way that a potential acquirer is going to be pleased with what they see.

They obviously want to see those strong profit margins. Ideally, that means that you’re targeting something in the 20 percent range, agency wide as your actual profit margin. That is your profit margin after you pay yourself a reasonable salary. Again, lots of resources on the SAGA website about owner compensation and the importance of understanding that.

In the context of the profit discussion, but you can’t just say that, that all of your compensation is profit. And that’s one of the reasons why small agency owners tend to be disappointed at their valuations because they pay themselves either no salary or a below market salary, and so that inflates their profit margin.

And once you recast those earnings to, to include a reasonable salary for yourself as the owner, all of a sudden that profit margin comes down. So you want to be thinking about that and managing towards that if you’re looking to maximize your sales price, in three or four years time.

You want to be thinking about the team that you’ve got and how you fit into it. In other words, can you be extracted from the equation and the business still thrives? If so, most buyers will pay more for that kind of business versus one that is really tied to you as an individual. They want a talented team that can execute on the work that you’re doing and selling, and so that it’s more than just a personality of one that they are buying.

They’re potentially looking for things that can fill their own gaps. So this is a little bit harder for you to manage now, but it’s something for you to be thinking about and perhaps observing the transactions that are taking place out there to see what kinds of, of things the agencies are doing and what the acquirers are looking at them for. So for example, this might be that consulting firm that’s looking to get more of the agency experience. That’s a gap that they have and consulting firms as they’ve moved into providing direct services and marketing, PR, digital, et cetera. They’re interested in bringing agencies in house so that they can provide those services to the clients.

Same thing with software companies. They’re often now looking. for this kind of a setup. And so that might be a gap, but it might be a gap where a larger agency doesn’t have the particular skill set that you have that your team has. So maybe a PR agency wants to acquire a digital agency. That’s a gap.

That’s something that you can help with. And so that’s something that is typically worth a bit of a premium to the buyer over what you might do off of a simple mathematical equation on valuation. And finally, there are the intangibles. There are the agencies that are out there that, that someone just, they really want to have them because they’ve got a lot of cachet and they’re, they’re, you know, the buyer thinks it’ll make a splash to acquire it.

Sometimes buyers want to do acquisitions just to say that they’ve done acquisitions. It’s not necessarily the best strategy, not one I would necessarily recommend, but I’ve seen it where an agency wants to show a steady pattern of acquisitions because they believe that it can help them win further business because it looks like, they’re being able to tell the story that they appear to be growing and that sort of thing.

As we look at the things that increase the value there are things that decrease the value. And some of these are simply the flip sides of what we talked about already, but they sometimes are a little bit more than that. So client concentration. Obviously we talked about the value of revenue diversification in order to increase your value. From the devaluation side, if you will, one of the things that you need to think about is if you’ve got clients that are 20, 25, 30 percent or more of your annual revenue, that’s a real client concentration problem that a potential buyer is going to be concerned about.

And you need to look at not just individual clients, but the relationships between them. So, a lot of small agencies may work with a number of different sub brands within a larger business. And while they, those contracts may have been technically won independently, they also are tied together because the parent company could change policies around the use of outside agencies, restrict the list of eligible agencies, or you could have a bad experience with one brand and then, the parent company says, everybody, you can’t work with Acme Agency anymore because we just don’t trust them.

We don’t feel comfortable working with them. And so those are the kinds of things that buyers are going to generally apply a discount to when they’re valuing your business and offering a sales price. So you want to be working over those next three, four years to make sure that you don’t have a client concentration problem.

We talked about margins already, but you definitely need to be focused on this. You should be focused on this anyway, even if you are just continuing to planning to continue to run the business for the next 10, 15, 20 years. Margins matter. Profits matter. You need to be thinking about how you’re pricing effectively, scoping effectively, and managing the work effectively to drive reasonably strong profit margins for the business.

Because that is something that every acquirer will pay attention to. Acquirers are not interested in buying struggling businesses at a fair price. They’ll buy a struggling business, a struggling agency, but they’re going to do it at a fire sale price that you’re probably not going to be happy with unless you’re really just looking to throw in the towel and get out the door.

Agencies that rely on one individual. That could be the owner. It sometimes is a key employee. If those are individuals that, without which the agency could not operate effectively or profitably, couldn’t win business, easily. Those are the kinds of things that generally are going to drive a discount in the offering price from a potential buyer.

So to the extent that you have a reliance on yourself, for example, or a key employee, you want to spend the next three or four years figuring out how you can balance that out, how you can bring in additional talent, how you can adjust the business model so that it is not so highly dependent. upon any one person.

I’ve seen, for example, agencies where the, all of the clients are tied very personally to the owner of that business. And while the numbers look great on paper, they are so tied to the owner that if the owner goes away and is not in the picture, those relationships are definitely at risk. And a potential acquirer is going to look very negatively at that sort of thing.

So try to find ways to diversify the importance of individuals, whether it’s yourself or someone else in the business over the next few years. Small size can also cause a discount. Generally speaking, the smaller you are, generally the lower the premium that a potential buyer will pay simply because you’re not buying as much.

If you’re a two person agency, you, there’s just not as much to acquire and there’s a lot higher risk. And of course that risk of any kind is something that really impacts the value of your business. So anything that you can think of that is a risk in the business. That’s the risk of, employees going out on their own, risk of lawsuits if you’ve got debt on the books, all of these, if you’ve got silent owners in the business, those are all risks that potential acquirers are going to look at and potentially be concerned with.

So those are all things that you want to try to address over the next few years so that at the very least you have a good strategy in place. If you haven’t already fully addressed those issues by the time it comes to a sale.

So, how do you frame your financials in such a way that you can make a compelling story when it’s time?

Because you want to be thinking about that now and not scrambling at the time where you’ve got a potential buyer on the line. You want to be preparing your financials today so that they look as strong as possible. And I’m not just talking the actual numbers. I’m talking now about some of the key things you need to be thinking about, like professional preparation.

You need to make sure that you are having your books done by someone who is competent, who can prepare things readily so that you can easily generate financial reports when it comes time to sell the business. You don’t want to be one of those agencies that’s pulling together a bunch of different spreadsheets and trying to acquire data from here, there, and everywhere.

When a potential buyer is asking for them. You need to have a ready made package that shows your three year track record, your financials, that it’s got it all there in a nice, neat package. You want to make sure that it’s all in a software platform, whether that’s QuickBooks or something else, where you can quickly generate reports if there are conversations that, that get progressed with a potential buyer, so that you can generate the reports that they ask for that maybe show breakdowns of certain expenses or revenue line items, et cetera. So you really want to have this package put together. And if you’re working, we’ll talk later about working with M&A advisors. They can really help you put together a nice package that makes it very clear, the value that you’re bringing to the table.

And it makes it very clear what your financial performance has been in such a way that you’re addressing the questions that buyers typically have. And you really want to make sure that these documents can explain key things like what is your profit margin, what is your compensation as the owner so that they know that it’s, it’s fair and accurate.

Being able to answer the questions about client concentration, recurring revenue versus project revenue. If you structure your financial reporting today in that way, it makes it so much easier three years down the road when you’re getting ready to sell. And you don’t have to do a lot of massaging and re engineering and digging through files and talking with your bookkeeper or accountant.

Make sure that you you’re really getting this process in place today. It’ll be useful to you running the business on your own, but it’ll be particularly useful when it comes time to talk with a potential acquirer.

And then finally, you want to make sure that you’re able to clearly explain any anomalies that are in these reports.

So if you show particular spikes in revenue or expenses, anything that’s unusual, you want to have, if you don’t explain it directly in the financial package that you’re providing, at least have a ready answer, so that if the buyer says, well, wait a minute, why, Why in June of 2023 did you have this giant spike in revenue?

It doesn’t make any sense to me. You don’t want to sit there and say, Oh, that’s a good question. I don’t know. I’ll have to go back and ask. Make sure that you’ve gone through your documents and you go through your financial reports on a regular basis so that you understand them and you understand intimately why those numbers may be up or down in any particular month, year or quarter.

So all things to think about so that you can put your best foot forward when it comes to financial reporting. You need to think about how you prepare your team, and I’m not talking at this point, you’re not going to tell your team I’m thinking about selling in three or four years. That, that is not something I would encourage, but I’m talking about how do you prepare to structure your team?

How do you work with them in such a place that it helps to maximize your value and makes the exit as smooth as possible? So some of this we’ve talked about a little bit already. You want a team that’s structured well so that it is – you’re providing value to the team. You’re not just dead weight, but you’re also not so essential to it that it can’t operate without you.

And a good test for this is, can you take two or three weeks off without having to answer a hundred emails a day and constantly putting out fires and answering questions? If your team can function well, and your clients are still happy, and you can take those two or three weeks off, then you’re probably in pretty decent shape.

But those are things that you want to be looking at now. How do you make those structural decisions that you need so that you’re not dependent upon yourself or any other individual, that you’ve got some good redundancies within the team. Those will all help you when it comes to maximizing what you can get for selling your business and the ease with which you can sell your business.

You also want to be thinking though about making sure you have the proper paperwork in place with all of your team members. Nothing puts a potential buyer off more than looking through and finding out that you have employees who can go out and poach your own clients from you, at any given moment.

So make sure that you have the proper agreements in place with your team members so that they, so confidential information is protected, there are non solicitation agreements in place. Work with lawyers and HR advisors to make sure you have the proper paperwork in place for all of your employees, it will make your life so much easier when it comes time to potentially sell the business.

Obviously, all of this doesn’t negate the fact that you need a highly capable team. The better your team can perform, the better the results that they can produce, the more attractive that is to a potential buyer. Obviously, you need to make sure that the compensation is fair and, and works to help you still generate a profit.

So you can’t just go buy an all star team of people and say, okay, well, this is going to make it easier for me to sell. It still needs to be a sustainable business model, but to the extent that you have a more capable, more talented team, it’s going to help.

And finally, sort of the less tangible thing, but something to consider is making sure that you’re hiring a team around you that is adaptable.

Because if you’re thinking about selling the business, you want people who are able to make, who can adapt to that new environment, that new employer that they may have down the road. It shouldn’t be your primary consideration, but if you have the choice between two equally capable candidates, but one seems to you to be more agreeable, adaptable, you know, able to, to learn and grow.

That person is probably going to be more of an asset when you’re potentially selling the business and less likely to be a squeaky wheel that causes some sort of a challenge during due diligence or at some other stage of the sales process. Again, not the thing that I would focus on the most, but something to keep in mind at least.

And frankly, those individuals are usually going to be a better fit for your business in the long term anyway, so it’s a win win.

How should you prepare yourself? And I’m talking about you, not the business now. So we’ve talked about how you need to think about what your post sale vision is. But you need to prepare yourself for everything that means.

And you need to accept that it’s just going to be different. And it is, I mean, as someone who has sold my own business, I can tell you that it is very weird having the brand that you’ve built over the years to be something that you don’t get to make the final decisions about. And that you don’t get to, to just say, yeah, I’m just going to do this or that.

You, you need to go check with other people. And you need to go, you need to build consensus. And, and all sorts of things that you didn’t have to do for the last period of time. So you need to accept that it’s going to be different. You also need to be skeptical of the promises that potential acquirers are making.

Because a lot of times, we all get caught up in the sales process. We all get excited about what it means, all the good things. But we also need to be realistic about what the potential pitfalls are. And talking with others who have gone through the process of selling their own business, you can often learn a lot and understand, are these things that are potential deal breakers for you?

Are they things that you just want to be aware of? Or are they things you don’t really even care about? If someone wants to go and get rid of the brand that you built, so what? Who cares? But you want to be thinking those things through and not get so wound up in the excitement of possibly selling the business that you’re not thinking clearly about what the change is going to mean for you.

You also need to be thinking about what it is that you want to be doing. And we talked about this a little bit in goal setting, but now in over the next three years or so, you need to start thinking about what does that post sale life look for you? If it’s again, this is assuming it’s not retirement. And so if it’s not retirement, you want to make sure that you are structuring the business in such a way that you are perhaps creating stepping stones to what your future career might be, or you need to be thinking about potential acquirers in terms of ones that are less likely to want to put hefty restrictions for longer periods of time on you for what you can do, post sale. And so thinking those things through will really help you to, take steps now to be ready then. And you don’t want to count your chickens before they hatch or anything like that, but you still want to be thinking about these things and laying that groundwork because it will make the transition a whole lot easier.

A lot of the owners that I know, they go through the sales process and then they kind of wander around a little bit aimless afterwards because they haven’t really come up with that plan in advance. And it sounds great to say, well, I’m just going to take some time off and think about my options. But the longer that you do that, if you haven’t made life changing money out of the sale, and most of you are not going to make life changing money out of the sale. That’s eating into the runway that you have. It’s eating into the flexibility that you have, and so the better prepared you are, the more you can hit the ground running post sale and be in a place where you are in that next stage of your career and your life that you’ve been dreaming of and why you’ve been thinking about selling your business.

So, so now let’s, let’s get into the nitty gritty. How do you think about expanding the pool of acquirers? Because you can lay a lot of groundwork for the business, but you can also lay a lot of groundwork for who potentially can buy your business in three or four or five years time. And so one of the things that you want to be doing is, keep a list of potential buyers.

This might be agencies that you’ve worked with in the past. It might be consulting firms that you’ve worked with in the past. It might be just folks that you see referenced in AdWeek or PRWeek or one of these publications. And you see that they’re buying different agencies, maybe you add them to the list.

And you want to try to build relationships with these folks. But you also want to build relationships with other owners. That would be owners of firms today who may be similarly situated to you. Maybe it opens the door to some sort of a merger or roll up talk somewhere down the road. Maybe they’re actually, you know, in a stronger financial position than you realize, and they could simply straight up acquire you.

We always need to be careful that we don’t read too much into any business, large or small, from what we know on the outside. Because I can tell you, there have been plenty of examples over the course of my career where I’ve looked at a certain business and thought they were particularly large or particularly small based on what I knew on the outside.

And then I got a look at their financials and realized it was a whole different thing. And so you want to be thinking about how you can network amongst your peers, but also seek out others who have sold their businesses over the years that you can talk with them. What was the experience like? What did they do to prepare?

What do they wish they had done three or four years pre sale to get ready? So that you can take advantage of the fact that you’re, you’re visualizing this in your future. It’s not something that you need to do urgently today. So you have that time to prepare, to build your network and to figure out how you want to structure things in a way that works for you and gets the results that you want.

But this is also a time to start at least some casual conversations with M& A advisors. This is a time for you to be scoping out who’s out there, getting to know them, perhaps consuming some of the resources that they’re putting out, because most M& A advisors put out a fair amount of useful resources.

And so you can get to know them and figure out if they might be fits, so that when you get closer to the sales process and when it makes sense to actually retain one of them to help you through the process. You’ve already done a lot of the legwork. And again, like everything else we’ve been talking about today, it’s not a mad scramble at the last minute.

Preparation is really your friend when you’re doing something as significant as selling your own business and moving on to the next stage of your career and life. So let’s talk about that. How do you get help in selling your agency? Obviously we’ve talked about some of the informal things like networks of former owners who have sold, current owners who maybe have had conversations around M and A, but the M and A advisors are something to really think about here in terms of folks who can actually help you.

And again, they do put out a lot of useful resources. One of the things I can tell you is that a number of them, do hold webinars and those sorts of things. Some of you in the agency world may be familiar with David C. Baker. He’s just put out a book not too long ago, Selling Your Professional Service Firm.

He does a lot of work with agencies, a lot of good resources. Consume those. And I’m not necessarily recommending David. Great guy. I haven’t worked with him on M& A. So I can’t directly recommend him, but he’s someone you should check out. And there are other people, Rick Gould, for example, in the PR agency space. A lot of these folks are really useful. They put out a lot of useful content, books, webinars, events and workshops. All of these things are worth understanding and grappling with so that you can start to get to know the M& A advisor space so that you can find someone that you’re comfortable with. I think the key thing though is to make sure that you’re working with someone who has experience with agencies.

You will, there will be no shortage. In fact, you probably already have your inbox, occasionally getting hit up by various business brokers saying, Oh, we’ve got a potential buyer for your agency. Or, you know, we, we checked you out and we’ve, we’ve found you interesting. Most of those are rubbish. Most of those are just, you know, people who are just casting lines to see what might happen, but they don’t know much about the agency space and they certainly don’t know anything about you and your particular situation.

You want to work with an M& A advisor who knows the space, who understands what the levers are that drive valuation, how to maximize the value that you’re getting, how to protect you against the potential pitfalls that are out there. And so the experience that they have in the agency space directly is going to be incredibly important and something to look at.

This is another place where talking with others who have sold their own agencies can be really helpful. Understanding from those folks, what worked, what didn’t, who did they work with as an advisor, can be very valuable. You don’t necessarily need to work with someone who is a true M& A advisor. You might choose, if you have a really trusted business lawyer or accountant that’s used to doing this kind of stuff, they might be able to help you as well.

They’ll do different things than what an M& A advisor who is seasoned in that particular aspect of things will do but that but it might be what you need. Not everybody needs the exact same solution but you need to think about and talk to as many people as you can so you find the right fit. It really is personal. When you’re talking about selling the business that you put in all of this time and energy into over the years. You really want to find someone who is someone that has a similar worldview to yours, who can help you, to get what you want from the business, and is not someone out there looking to just pad their own pockets. Whether or not it is good for you or not.

And that’s why you also need to understand the different compensation structures that exist for M& A advisors. Because some work off of commission on the total deal value. Some charge flat fees to get involved. Some charge hourly rates. There’s a lot of different compensation models and so you want to understand those and really work through, the math to make sure that it, it really works and makes sense for you and what you’re trying to do.

So these are all things to consider as you’re figuring out how to get the help that you need in order to get the most from your business and get the terms that you’re looking for when the time comes. So with that, let’s tie up with a ribbon here, the key points that we want to be thinking about here.

We want to be thinking about, what we want from the business or from the sale rather. We want to make sure that were clear about that as we’re going into the process. It helps us drive the decisions that we make over the next three or four years to maximize the value and get the kind of deal that we’re looking for.

It’s important that you put in the preparation over this time frame. Take advantage of it. Don’t just say, yeah, I’d kind of like to sell in three or four years. Then you kind of see what happens. If that’s your plan, if that’s your goal, think about the steps that we’ve talked about today that will help you to maximize your value, build a team structure, build a financial structure, set the course to give you what you want from the goals that you’ve set.

And then finally, turn to get the help that you need when it’s needed, whether that’s an M& A advisor or the free advice that’s out there. Webinars like these, talking to your peers. Help is really important and will help you to navigate this process, and make the right decisions and sell frankly at the right time for the right reasons.

So, with that, that will wrap up the prepared portion of today’s presentation. If you’ve been watching live, we’ll move into the Q& A portion here in just a moment. If you are watching this on replay, the replay will conclude here, but feel free to send me an email at chip@smallagencygrowth.com.

I’d be happy to answer it. If you’re watching live, you can use that email address as well, if you’ve got a question that you’d rather I answer, but not in a public forum. So, thank you all for joining me today, and we’ll head to the live Q& A momentarily.

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